Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

show work for all steps A bicycle manufacturer currently produces 280,000 units a year and expects output levels to remain steady in the future. It

show work for all steps
image text in transcribed
image text in transcribed
image text in transcribed
A bicycle manufacturer currently produces 280,000 units a year and expects output levels to remain steady in the future. It buys chains from at outside supplier at a price of \\( \\$ 1.80 \\) a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only \\( \\$ 1.40 \\) per chain. The necessary machinery would cost \\( \\$ 292,000 \\) and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposes using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require \\( \\$ 53,000 \\) of inventory and other working capital upfront (year 0 ), but argues that this sum can be ignored since it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are \\( \\$ 21,900 \\). If the company pays tax at a rate of \35 and the opportunity cost of capital is \15, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier? Compute the NPV of producing the chains from the FCF. The NPV of producing the chains from the FCF is \\( \\$ \\quad \\) (Round to the nearest dollar. Enter a negative NPV as a negative number.) Compute the difference between the net present values found above. The net present value of producing the chains in-house instead of purchasing them from the supplier is \\( S \\) (Round to the nearest dollar.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Finance questions